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South Asia Investor Review is focused on reporting, analyzing and discussing the economy and the financial markets of countries in South Asia, including Pakistan, Bangladesh and Sri Lanka. For investors looking to invest in emerging markets beyond BRIC countries (Brazil, Russia, India and China), this blog is designed to help international investors looking to learn about investing in South Asia with focus on Pakistan. Riaz has another blog called Haq's Musings at http://www.riazhaq.com

Defense Economics: Guns or Bread in India and Pakistan?

I have just published on my blog, Haq's Musings, a guest post by Colonel Pavan Nair, a retired Indian Army officer, a detailed analysis of the Indian defense spending in the context of the nation's growing needs for social spending on food, education and health care. Col Nair prefaces his analysis by lamenting that "defense economics has not been a subject for serious study or debate in Indian academic or military circles. Little or no literature is available with the exception of a few books in the area of defense accounts. Economists and activists have long argued that defense related expenditure needs to be curtailed. Opinion is clearly divided between the developmental lobby and strategic thinkers who wield influence with the political leadership."

Nair then goes on to accept the challenge of defense economics in India by laying out his case with lots of data and sources, and concludes with the following:

Besides external defense, internal security and human-development form a vital part of the overall security and well-being of the nation. Is the rupee being spent wisely? The answer is in the negative both in terms of quantum and efficacy. DE has risen to unsustainable levels in the last decade primarily on account of dependence on imports and nuclearization. There is a trade-off between defense and developmental spending specifically in the area of health which becomes visible in poor human-development parameters like infant mortality rates and child malnutrition. Bangladesh is well ahead of India in these parameters. Internal security has been neglected for too long. There is a need to balance overall expenditure to meet the challenge of the emerging economic and strategic scenario. Force levels need to be reviewed. Like obsolete equipment, obsolete organizations should be dispensed with. The army has become equipment and staff oriented. It also remains manpower-intensive with too few junior officers and a large tail. The Thirteenth Finance Commission could look into aspects of internal and external security to come to a reasonable limit for both. It would also be expedient if the Commission specifies what constitutes defense spending and whether Defense Services Civil Estimates should form part of defense expenditure. DE must be capped at current levels.

Not only is India the lowest among BRIC nations in terms of human development, India is also the only country among the top ten military spenders which, at 134 on a list of 182 nations, ranks near the bottom of the UNDP's human development rankings. Pakistan, at 141, ranks even lower than India.

India also fares badly on the 2009 World Hunger Index, ranking at 65 along with several sub-Saharan nations. Pakistan ranks at 58 on the same index.

Access to healhcare in South Asia, particularly due to the wide gender gap, presents a huge challenge, and it requires greater focus to ensure improvement in human resources. Though the life expectancy has increased to 66.2 years in Pakistan and 63.4 years in India, it is still low relative to the rest of the world. The infant mortality rate remains stubbornly high, particular in Pakistan, though it has come down down from 76 per 1000 live births in 2003 to 65 in 2009. With 320 mothers dying per 100,000 live births in Pakistan and 450 in India, the maternal mortality rate in South Asia is very high, according to UNICEF.

A sobering thought to keep in mind though. Impressive growth figures are unlikely to stun the poor into mindless optimism about their future. India has long been used to illustrate how extensive poverty coexists with growth. It has a shabby record in pulling people out of poverty - in the last two decades the number of absolutely poor in India has declined by 17 percentage points compared to China, which brought down its absolutely poor by some 45 percentage points. The number of Indian billionaires rose from nine in 2004 to 40 in 2007, says Forbes magazine. That's higher than Japan which had 24, while France and Italy had 14 billionaires each. When one of the world's highest number of billionaires coexist with what one economist calls the world's "largest number of homeless, ill-fed illiterates", something is gravely wrong. This is what rankles many in this happy season of positive thinking.

It is time for major South Asian nations to deal with the urgent need for careful balancing of their genuine defense requirements against the need to spend to solve the very serious problems of food, education, health care and human resource development for securing the future of their peoples.

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Recently, a former editor of the Statesman in Calcutta, Sunanda K Datta-Ray, humorously wrote in the Indian Telegraph what the answer would be to anyone questioning British aid to India, saying that the likely retort would be along the lines of: “Well, after they’ve paid for their military and space programmes, there’s very little left for food."

The government is expected to freeze the level of assistance given to India at £295m ($480m) a year. But why does a nuclear power with its own space programme need British aid?

In a widely-signalled move, it is anticipated that International Development Secretary Andrew Mitchell will announce the amount of aid given to India will be maintained at 2009/10 levels.

But the decision has attracted criticism from newspapers and politicians who say the UK taxpayer does not need to donate to a state that is itself a foreign aid donor, which is classified by the World Bank as a middle income country (MIC) and whose economy is growing at nearly 10% a year.

However, advocates of aid say a third of the planet's population who are below the World Bank's extreme poverty line live in India. They also argue half of all children in the country are malnourished and it does not have the tax base to eliminate poverty though internal wealth redistribution.

Andy Sumner of the Institute of Development Studies says: "If UK aid was reduced, there is no guarantee that the funding to the poorest states where most of India's chronically poor live would be topped up by the Indian government."

Although the Department for International Development's budget has been unaffected by the government's spending cuts programme, the UK is expected to stop direct aid to 16 countries, including Russia, China, Vietnam, Serbia and Iraq.

India replaced China as the world’s top weapons importer, according to a study by the Stockholm International Peace Research Institute, as it aims to modernize its armed forces and project power through the region.

India received 9 percent of the volume of international arms transfers from 2006 to 2010, with 82 percent of that coming from Russia, Sipri said in a report released today. That topped China, South Korea and Pakistan, it said.

“The increases are substantial, and if you look at the Indian plans for the near future, they are massive,” Siemon Wezeman, a Sipri researcher who helped write the report, said in a telephone interview. “It’s worrying from the fact you are bringing a lot of weapons into an area that isn’t particularly stable, where you’ve got countries that have been at each other’s throats.”

India’s internal security threats and rivalries with Pakistan and China, the nuclear-armed neighbors with which it has border disputes, have driven the increase in expenditures, Wezeman said. The country’s plans to boost defense spending in the next decade to modernize the military have attracted U.S. and European firms banned from selling weapons to China.

The average volume of worldwide arms transfers in 2006-2010 was 24 percent higher than in 2001-2005, the report said. The Asia-Pacific region led the world, accounting for 43 percent of arms imports. It was followed by Europe at 21 percent, the Middle East at 17 percent and the Americas at 12 percent.Economic Growth

India’s $1.3 trillion economy may expand by as much as 9.25 percent in the next financial year, the fastest pace since 2008, according to a Finance Ministry survey released last month. The World Bank estimates that more than three-quarters of India’s 1.2 billion people live on less than $2 a day.

Purchases by India of submarines, aircraft carriers and transport airplanes “can only be seen in the framework of regional ambitions,” Wezeman said.

India is seeking to buy 126 warplanes in the world’s biggest fighter-jet purchase in 15 years, according to the Indian Defense Ministry. Paris-based Dassault Aviation SA (AM), Chicago-based Boeing Co. (BA), Bethesda, Maryland-based Lockheed Martin Corp. (LMT), Sweden’s Saab AB (SAABB), Russia’s United Aircraft Corp. and European Aeronautic, Defense & Space Co., based in Paris and Munich, are competing for the contract.

The outlays on weapons have allowed India to demand technology transfers as part of purchases, Sipri said. The U.S. and Europe have banned weapons sales to China since the 1989 Tiananmen Square crackdown. U.S. military officials have questioned China’s motives in developing ballistic anti-ship missiles and radar-evading fighter jets.‘Huge Market’

India is “in a position where they have this huge market at a time when exporters are in desperate need to find export markets,” Wezeman said.

The U.S. remains the world’s largest exporter of military equipment, accounting for 30 percent of arms deliveries between 2006 and 2010, the report said. The Defense Department is requesting $671 billion for the 2012 fiscal year starting Oct. 1, $37 billion less than this year’s request.

Stockholm-based Sipri, founded in 1966, conducts research into conflict, armaments, arms control and disarmament, according to its website. A substantial part of its funding comes from the Swedish government, it said.

One of the deals includes a missiles sale worth $500 million, which, if signed, would make 2017 a record year in terms of Israeli weapons sales to India

Indian Prime Minister Narendra Modi is expected to sign an agreement to purchase more weapons systems during his visit to Israel on Tuesday, Indian media outlets have reported.

One of the likely deals includes the purchase of 8,000 Spike anti-tank missiles, worth about $500 million, from Israel’s Rafael Advanced Defense Systems. The sale has been delayed for about two years, but in the past few weeks it was brought to the Indian cabinet for approval. If the deal is finalized, 2017 will be a record year in terms of Israeli weapons sales to India, a major client of Israeli defense industries.

Last year, the Indian government signed two large deals with the Israel Aerospace Industries, a government-owned company that develops and sells defense and weapons systems. IAI reported the signing of the deals in the past few months: One worth almost $2 billion includes the land-based version of the Barak 8 air defense system, as well as the naval version to be installed on the Indian navy’s aircraft carrier. The second deal, worth $630 million, was signed with the Indian state-owned company Bharat Electronic Limited for the installation of the Barak 8 systems on four navy ships. This aerial defense system was developed as a joint project between India and Israel, and the sales are a continuation of the policy of cooperation between the countries.

India and Israel also cooperate to a great extent on defense matters, in particular the air forces and navies. Last month, the commander of the Indian navy visited Israel. In another three months, Indian pilots will participate in the Blue Flag air force training exercise held in Israel, along with representatives of a number of other countries.

India has also expressed great interest in Israeli methods to protect offshore gas drilling platforms in its economic waters in the Mediterranean Sea. A working group was established between the navies of the two countries as part of India’s interest in the matter. The work is focusing on the ability to monitor and protect the large maritime region. “They have a threat from Pakistan, so India is trying to learn from things that are similar here,” a senior officer in the Israeli navy told Haaretz. “We intend on continuing to cooperate and see where the challenges overlap. It is a joint need, both for them and for us,” said the officer.Over the past few years, India has shown interest in buying additional weapon systems from Israel, including the Phalcon early warning, command and control and intelligence planes or drones. The $1 billion-Phalcon deal, also considered to be a huge contract, has yet to be implemented even though it was approved by the Indian cabinet.Israeli companies are also discussing the sale of drones with the Indian government, including the IAI’s Heron TP, known in Israel as the Eitan, which was shown at a defense show in India this year. Despite the optimism concerning the weapons deals, Israel is not at all certain that Modi’s visit will bring about significant progress in these agreements.read more: http://www.haaretz.com/israel-news/.premium-1.799076

Indian Prime Minister Narendra Modi will arrive in Israel on July 4 on an official visit to celebrate 25 years since the establishment of full diplomatic relations between the two countries. Unlike other heads of state, and notwithstanding the fact that the world has just marked 50 years of Israeli occupation of the West Bank and the Gaza Strip, Modi has decided not to visit the Palestinian Authority. This has not come about by chance.

One can assume that Modi and Israeli Prime Minister Benjamin Netanyahu will get along well. After all, both are nationalist leaders who have been accused of manipulating feelings of fear among the public, attempting to weaken democratic institutions and restricting the right to free speech. Under their watch, their security forces have also been accused of violating human rights and attempted to cover up these violations – in the West Bank and Gaza in the case of Israel, and in Kashmir and the North East, in the case of India.

According to publications in Israel and in India, Modi’s visit is to take place against the backdrop of one of the largest arms deals ever involving Israeli security industries. The deal, worth an estimated Rs 3,200 crores, includes, among other things, missiles, surveillance and monitoring systems, reconnaissance planes and weaponised drones.

Although one cannot overlook the tremendous security challenges that India faces while protecting its 1.3 billion citizens, the people of India should keep in mind that military deals with Israel carry an additional price tag – the importation of a militaristic Israeli model, and the Israeli state’s expectation that a government that purchases arms from it will stand alongside it against the Palestinian people in international forums.

Israel’s security modelNot only does Israel sell security systems to other regimes, it also sells a concept – the militarisation of civilian institutions and forces, endless war, and the viewing of large parts of one’s own citizenry as enemies.

Israel’s Palestinian citizens are second-class citizens whose citizenship is disposable, according to Israeli Defence Minister Avigdor Lieberman, who seeks to transfer them without their consent to the Palestinian Authority. Regardless of their level of education, their involvement in Jewish society, and even their positions in civil service or government institutions – when these Palestinian citizens wish to fly from Ben Gurion International Airport, enter a shopping mall in one of Israel’s main cities or apply for a job, they are automatically considered potential terrorists.

This applies all the more to the civilian Palestinian population in the West Bank and Gaza Strip, who are considered to constitute a high security risk by the State of Israel, and are under constant military surveillance. Every Palestinian who opposes the Israeli occupation – even if they act nonviolently, or take no action at all on this issue – has no right to political expression and protest as far as the military occupation regime is concerned.

The Israel Defence Forces Military Order 101, which has been in effect in the West Bank since 1967, bans the assembly of more than 10 people and any political expression unless a military commander has issued a permit for it. According to the order, anyone who violates its stipulations may be imprisoned for up to 10 years. There is no need to deliberate at length as to what Mahatma Gandhi would have made of this order.

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I am the Founder and President of PakAlumni Worldwide, a global social network for Pakistanis, South Asians and their friends. I also served as Chairman of the NEDians Convention 2007. In addition to being a South Asia watcher, an investor, business consultant and avid follower of the world financial markets, I have more than 25 years experience in the hi-tech industry. I have been on the faculties of Rutgers University and NED Engineering University and cofounded two high-tech startups, Cautella, Inc. and DynArray Corp and managed multi-million dollar P&Ls. I am a pioneer of the PC and mobile businesses and I have held senior management positions in hardware and software development of Intel’s microprocessor product line from 8086 to Pentium processors. My experience includes senior roles in marketing, engineering and business management. I was recognized as “Person of the Year” by PC Magazine for my contribution to 80386 program. I have an MS degree in Electrical engineering from the New Jersey Institute of Technology.
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